A draft Communication on Accounting Harmonisation: a new Strategy vis-à-vis
International Harmonisation has been adopted by the European Commission on
the initiative of Single Market Commissioner Mario Monti. The Communication
outlines a Commission action plan to ensure European Union companies looking
to raise capital on international markets do not have to draw up more than
one set of consolidated accounts. The action plan also aims to improve the
comparability of consolidated accounts drawn up by companies in different
Member States. The Communication is due to be presented to the Internal
Market Council on 23 November. It will also be transmitted to the European
Parliament.
"We consider companies should only be required to prepare one set of
consolidated accounts", commented Commissioner Monti. "In line with the
strategy outlined in this Communication, we will examine the possibility for
EU companies, with an international vocation, to prepare their consolidated
accounts on the basis of international accounting standards. However, we
are determined to achieve this objective without resorting to additional EU
legislation. Our strategy is to simplify and improve financial reporting
requirements in the Single Market, not to create new administrative
burdens".
"This decision", concluded M. Monti, "shows our determination to ensure the
right framework for EU companies to be competitive on world markets while at
the same time cutting back on legal and administrative red tape".
Key objectives of the new strategy proposed by the Commission are : easier
access for European companies to international capital markets and improved
comparability of consolidated accounts prepared by those companies which are
important players within the Single Market.
The problem for companies seeking stock exchange listing outside the EU is
that the accounts which they prepare on the basis of their national
legislation, which follows from the EU Accounting Directives (notably the
4th and 7th Company Law Directives on annual and consolidated accounts,
78/660/EEC and 83/349/EEC), are not accepted in major securities markets
outside Europe. Instead, EU-based companies wishing to raise capital on
third country markets can be required to establish different sets of
accounts in order to meet different financial reporting requirements. For
example, when Daimler-Benz sought a listing on the New York Stock Exchange,
it was obliged to completely reorganise its accounting system in order to
satisfy the requirements imposed by the US Securities and Exchange
Commission.
The production of different sets of accounts with different results or the
reconciliation of accounts with the indication of different amounts for net
profit and shareholders equity is misleading and reduces the confidence of
investors in the credibility of the accounting rules. In order to bridge the
gap between present financial reporting requirements in the EU and the needs
of the international capital markets, a new strategy has been proposed in
the Communication.
Rather than create a European Accounting Standards Board or a new layer of
European accounting standards on top of the existing layers of national and
international standards, the Communication proposes to associate the EU with
the efforts undertaken by IASC (International Accounting Standards
Committee) and IOSCO (International Organisation of Securities Commissions)
towards a broader international harmonisation of accounting standards. As a
matter of priority, the Commission will therefore examine, together with the
Member States in the context of the Contact Committee on the Accounting
Directives, the conformity of existing International Accounting Standards
(IAS) with the EU's Accounting Directives. Establishing that these
standards are in conformity with the Accounting Directives is an essential
first step if Member States are to allow their companies to prepare their
accounts on this basis. If this examination reveals any inconsistencies
between the directives and IAS, these will be examined on a case by case
basis.
A greater emphasis on international accounting standards means that more
attention should be paid in the international harmonisation debate to
European interests. It is therefore essential to improve coordination
between all bodies which play a role in accounting standard setting in the
Member States. Better coordination is also necessary to improve the
comparability of the accounts of those companies which are not seeking a
listing on international capital markets but which are nevertheless
important players within the Single Market. Lack of comparability can give
rise to distortions of competition and hinder potential investors'
assessment of a company. In order to achieve this enhanced coordination,
the Communication proposes to improve the functioning of the Contact
Committee set up under the 4th Company Law Directive on the annual accounts
of limited liability companies. The Contact Committee should deal with a
number of accounting issues for which no immediate solution is found in the
existing Accounting Directives. Of course, this is only possible within the
limits determined by the Accounting Directives. The Commission will decide
how to make the best use of the advice given by the Committee, for example
to include it in an interpretative Communication or in a Recommendation.
Effective technical cooperation in the Contact Committee will make it
possible to avoid legislation in most cases.
It is proposed to concentrate the work of the Contact Committee on
consolidated accounts. A more general approach including individual accounts
would be more likely to run into controversy, since these are in many Member
States directly related to reporting for tax purposes and to the assessment
of the profit available for distribution.
The Commission believes that professionals using and preparing accounts
should remain closely associated with the work of the EU in the accounting
field. The Accounting Advisory Forum, which was set up in 1991 and
comprises representatives of the main professions using and preparing
accounts as well as of national accounting standard setting bodies, will
therefore continue its role as a consultative body. The expertise available
in the Forum will be associated with the technical work of the Contact
Committee.
With its Communication, the Commission wants to offer a clear prospect that
companies seeking listings on the US and other world markets will be able to
remain within the EU accounting framework and that US GAAP (Generally
Accepted Accounting Principles), over which they and their governments can
exercise no influence, is not the only option. With this new strategy, the
EU is not abandoning the field of accounting harmonisation, but is rather
strengthening its commitment and contribution to the international standard-
setting process, which offers the most efficient and rapid solution for the
problem of companies operating on a world-wide scale. At the same time, the
improvement of the level of financial reporting of European companies with
an international vocation will certainly have a positive impact on financial
reporting practices of other European companies. It is expected that
improved financial reporting in consolidated accounts will encourage small-
and medium-sized companies to improve their financial reporting, even though
they do not prepare consolidated accounts themselves. The implementation of
this new strategy will ultimately benefit both users of accounts and those
who prepare them.
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